What the rise in "real yields" says about markets
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Yields on inflation-protected long-term Treasury bonds are a lot higher than they've typically been in decades.
Why it matters: This is one of those times when what happens in the bond market matters to the stock market.
How it works: Rising yields on inflation-protected Treasury securities, known as TIPS, mean the market is offering investors an increasingly attractive way to lock in stock market profits notched over the last two and a half years.
- In other words, when these yields go up, it shifts the balance of risk and reward that influences where investors put their money.
Fun fact: Financial folks often refer to TIPS yields as "real yields" because they show you what investors receive — their real return — after the impact of inflation.
Zoom in: As our colleagues over at Axios Macro mentioned a few days ago, the rise in real yields reflects a few things at once.
- On one hand, it is a side effect of declining worries about inflation over the last month as the U.S. and Iran seemed focused on ending hostilities and new Federal Reserve chairman Kevin Warsh appeared to strike an anti-inflationary tone in his early days at the Fed.
- On the other, it reflects the strength of the AI-driven U.S. economy, where demand for capital is so fierce that the U.S. government is required to offer higher yields to compete for investor dollars.
- And finally, it reflects the large and growing deficits that the U.S. government and other countries around the world are running amid an international rearmament scramble, which should also keep yields elevated.
The bottom line: This adds up to an advantage for investors, especially if they're getting tired of stomaching the stock market's inherent ups and downs.
